May 30, 2012 / 1:32 AM / 6 years ago

Euro falls 1 percent vs U.S. dollar to near two-year low

NEW YORK (Reuters) - The euro weakened 1 percent in value against the U.S. dollar on Wednesday, slumping to a near two-year low as Europe’s sovereign debt crisis and banking sector concerns sapped investors’ resolve and pushed them to sell the euro zone common currency.

An illustration picture shows Euro banknotes in Brussels November 28, 2011. REUTERS/Thierry Roge

The U.S. dollar hit a fresh 15-month high against the Swiss franc while sterling dropped about 1 percent against the greenback. Investors also bought Japanese yen as a safe haven.

A bond sale in Italy on Wednesday resulted in surging costs for the government. Rome was forced to pay a yield of more than 6 percent on 10-year debt for the first time since January. The Spanish equivalent neared the dangerous 7 percent level that forced Ireland and Greece to seek bailouts.

Greece’s potential exit from the euro zone, a scenario that officials are preparing for while still advocating it remain a part of the currency union, have set a generally skittish environment in Europe.

“There are worries now that you could see the issues in Europe not being constrained to just staying in Europe and could have more of a worldwide effect. That’s very dangerous and why you are seeing the action you are seeing today,” said Bob Gelfond, chief executive officer of MQS Asset Management, a global-macro hedge fund in New York.

Asset managers and strategists say the focus in Europe is too much on austerity, meaning policy makers are addressing the short-term symptoms such as unsustainable debt rather than root causes such as promoting long-term growth.

Real money and institutional investors stepped up selling on signs the bloc’s debt crisis is spreading to larger economies.

“I think everybody was looking for an excuse to jump on the bandwagon for selling the euro,” said Ravi Bharadwaj, market analyst at Western Union Business Solutions in Washington, D.C.

“The fear is that a lot of the imbalances that have been built up so far have been funded and financed by banks in Europe. As the different sovereign entities look to stabilize their financial systems, they are in effect just feeding a massive feedback loop.”

The euro fell as low as $1.2360, according to Reuters data, the lowest since July 1, 2010. It was last at $1.2374, down 0.98 percent on the day. Support now lies around $1.2150, a low touched in late June 2010, and then the 2010 low of $1.1875.

Adding to pressure on the euro were poll results showing Greece’s radical leftist SYRIZA party has taken the lead over the pro-bailout conservatives. Greece is holding a national parliamentary election next month that may determine whether the debt-laden country stays in the euro zone.

The euro staged the short-lived bounce after the European Commission said the euro zone should move towards a banking union and consider eurobonds and the direct recapitalization of banks from its permanent bailout fund.

A government source told Reuters on Tuesday that Spain would likely recapitalize Bankia (BKIA.MC), which asked for 19 billion euros on Friday, by issuing new debt and possibly drawing cash from the bank restructuring fund and Treasury reserves.

    “The euro is in an extremely vulnerable position and downside risks are very strong indeed,” said Jane Foley, senior currency strategist at Rabobank. “The Spanish banking crisis has the potential to knock the stuffing out of the euro zone irrespective of the Greek election results.”

    “The issues for Spain are undoubtedly huge and most people are coming round to the idea that it will need to go outside of its borders for assistance. The longer it delays, the more the risk of a bank run.”

    The euro lost 1.5 percent against the safe-haven yen, taking it to a four-and-a-half month low of 97.73 yen. The dollar hit a three-and-a-half month low of 78.85 yen and was last down 0.53 percent at 79.10.

    Sterling dropped over 1 percent against the U.S. dollar to $1.5476, extending its losses to a fresh four-month nadir. In May alone, it is down 4.7 percent.

    The dollar index .DXY, which measures its value against a basket of other major currencies, rose 0.7 percent to 83.072, its best level since September 2010.

    The dollar also rose over 1 percent to a new 15-month high against the Swiss franc at 0.9714 franc on Reuters.

    The higher-yielding Australian dollar fell 1.23 percent to $0.9721, slipping towards a six-month low at $0.9690, after weaker-than-expected retail sales data underscored the case for interest rate cuts.

    Additional reporting by Wanfeng Zhou; Editing by James Dalgleish

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